Out-Law / Your Daily Need-To-Know
The UK’s Financial Conduct Authority is to ban motor finance commission models that give brokers or dealers an incentive to set higher interest rates charged to customers to boost their commission.
The announcement of the ban (35 page / 661KB PDF) follows a review into the market in early 2019, and a period of consultation at the end of last year. However, the ban will not come into force until 28 January 2021, due to the current disruption caused by the coronavirus pandemic as well as consultation feedback asking for an extended implementation period.
The FCA said it was banning the use of discretionary commission models in the motor finance market where the amount of commission the broker receives is linked to the interest rate paid by the customer, and which the broker has the power to set or adjust.
The regulator said it expected brokers to negotiate alternative commission models, adding that it was deliberately not specifying which models they should use. It suggested alternative models could include risk-based pricing if the broker was not incentivised to set or adjust the rate charged, or flat-fee models.
Supervisory work to monitor how well firms are complying with the ban would begin in September 2021. The FCA said it would examine the alternative models being used by firms as well as the range of interest rates and the commission earned. It is also planning a point-of-sale mystery shopping exercise to measure lenders’ control over dealer networks.
FCA interim chief executive Christopher Woolard said the move would increase competition and protect consumers, saving customers around £165 million.
Meanwhile, the FCA will amend its rules and guidance on the disclosure of commission arrangements with lenders across all consumer credit sectors, to help consumers receive appropriate information on commission and how it impacts the amount they pay.
Financial regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said the consultation showed not all industry participants supported the FCA’s proposals to ban discretionary commission models.
“Unsurprisingly the FCA has concluded that a ban is necessary to limit incentives that could drive consumer harm. While the FCA did not listen to requests to look at alternate remedies it has taken on board industry’s comments about a need for a longer period of three months to implement the ban,” Barber said.
“The FCA has also agreed that the changes to commission disclosure rules should come into effect on the same day as the ban on discretionary commissions – as opposed to their original plans for an immediate change,” Barber said.
“Given firms are still dealing with the impact of lockdown and significant changes to systems and contracts will be required to deal with the ban they should not sit on their hands. Firms need to start working up and implementing their plans quickly,” Barber said.
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